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By New_Deal_democrat April 16, 2016 9:21 am
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Weekly Indicators: leading measures improve, coincident measures tank edition
Monthly data for March featured a big decrease in industrial production and capacity utilization.  Retail sales also fell.  A decline in vehicle sales was blamed for the bad numbers.  Producer prices decreased, but consumer prices increased slightly.  Consumer sentiment as measured by the University of Michigan also declined.
 

My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available.  They are also an excellent way to "mark your beliefs to market."

 

In general I go in order of long leading indicators, then short leading indicators, then coincident indicators.

 

Interest rates and credit spreads

  • 4.78% BAA corporate bonds up  +.02% (down over -.60% since Jan 1)
  • 1.70% 10 year treasury bonds up +.07%
  • 3.08% credit spread between corporates and treasuries down -.05%
Yield curve, 10 year minus 2 year:
  • 1.02%, up +.01% w/w
30 year conventional mortgage rate:
  • 3.64%, unchanged w/w

With the exception of BAA corporate bonds yields, which made a new 50+ year low in January 2015, yields for corporate bonds, treasuries, and mortgages have all failed to make new lows in 3 years, thus turning yellow (caution or neutral vs. positive) as a recession indicator -- although treasuries and mortgage rates both came very close to new all-time lows in February, and remain low enough to be short-term positives.  Spreads remain negative, although they have improved significantly in the last two months. If spreads fall below 2.75%, I will score them a positive.  The yield curve has gone from extremely to only normally positive.

Housing

 

Mortgage applications

 

  • purchase applications up +8% w/w
  • purchase applications up +24% YoY
  • refinance applications up +11% w/w
 
Real Estate loans
  • -0.1% w/w
  • +6.3% YoY

Mortgage applications had been awful for several years, before turning up early last year in response to very low rates. They are now strongly positive.

Real estate loans have been firmly positive for two years.

 

Money supply

M1

  • +0.3% w/w
  • +1.8% m/m
  • +5.6% YoY Real M1
M2
  • -0.3% w/w
  • +0.9% m/m
  • +5.5% YoY Real M2 

Real M1 decelerated markedly in January to the point where it was a very weak positive, and has fluctuated since then.   Real M2 has also decelerated, but has been more firmly positive.  Both were very positive this week.

 

Trade weighted US$

  • Up +0.07 to 119.84 w/w, up +4.1% YoY (Broad)  
  • Up +0.49 to 94.70 w/w, Down -2.8% YoY (major currencies)

 

The Broad measure is reported by the FRB on Mondays and so is delayed one week. Bloomberg's spot price against major currencies is accurate as of Friday.  The US$ appreciated about 20% from July 2014 through March 2015.  Afterward, the broad measure continued to appreciate, but at a relatively more moderate trend, while against major currencies the US$ has been flat.  l consider a YoY change of 5% or higher a negative. The broad measure has now fallen below that mark, and against major currencies, the US$ turned outright positive.

 

Commodity prices

JoC ECRI

  • Up +2.17 to 88.89 w/w 
  • Down -13.48 YoY
BBG Industrial metals ETF
  • 93.48 up +3.32 w/w 
Commodity prices as measured by industrial metals appear to have bottomed in November. ECRI and oil have also now turned up. The YoY comparisons for commodities are thus "less bad" enough that they are now a neutral.

 

 Stock prices S&P 500

 

  • Up +1.6% w/w
  • Down -2.9% from 1 year high 11 months ago
Stock prices made new 6 month lows in February, and are still slightly below their recent highs in November. For forecasting purposes, I am scoring this as a slight negative.
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • *Empire State up +1 to +11
  • Philly up +21 to +16
  • Richmond up +30 to +24
  • Kansas City up +5 to -2
  • Dallas up +13 to -5
  • Month over month rolling average: unchanged at +9
I inaugurated coverage of these indexes as an experiment.  Since the ISM new orders index is an excellent short leading indicator for sales and industrial production (roughly by 6 months), can a rolling average of these regional indexes reasonably forecast the direction and intensity of moves in that monthly index?  Only 1 data point, but so far March's surge is holding up in April.

 

Employment metrics

 Initial jobless claims

  • 253,000  down -14,000 (tie for 40 year low)
  • 4 week average 265,000 down -1,750

 

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average. After weakening in January, they have since recovered.

 

The American Staffing Association Index

 

  • Unchanged at 94 w/w
  • Down -2.75 YoY

Since last spring, the YoY comparison turned neutral and then increasingly negative, although since the beginning of the year it has generally been "less worse."  I would need this series to be -2.15% YoY or less for me to believe it has bottomed.

 

Tax Withholding

  • $90.1 B for the first 10 days of April vs. $87.4 B one year ago, up +$2.7 B or +3.1%
  • $163.0 B for the last 20 reporting days ending Thursday vs. $163.9 B one year ago, down -$0.9 B or -0.5% 

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, while still positive, since August. In February I said I would need this series on the 20 day basis to decline to less than +2% YoY for me to think it has reached a turning point, and it did so for 3 weeks in a row, thus becoming a major red flag.  That abated for several weeks, but this week the 20 day rolling sum went negative again, although the month of April is positive. 

 

Oil prices and usage

  • Oil up +$0.64 to  $40.36 w/w
  • Gas prices down -$.01  to $2.07 w/w 
  • Usage 4 week average up +5.7% YoY

 

The price of gas bottomed this winter at $1.69.  Usage turned briefly negative at the beginning of the year, but is now positive again.

 

Bank lending rates

 

Both TED and LIBOR were already rising since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations.  Both TED and LIBOR were at or near 5 year highs in the past several months, but both have improved in the last several months, although in the last 3 weeks the TED spread rose back close to that high.

 

Consumer spending

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat since the beginning of November, although JR was weak this week.  On the other hand,  Gallup has been positive almost every week so far this year which, because it includes gas purchases, strongly suggests that consumers have started to spend some of their gas savings on other things.  This is in contradiction to the weak monthly retail sales numbers for the last 2 months, although the weakness in retail has been mainly focused on cars.

 

Transport

Railroad transport

  • Carloads down -20% YoY
  • loads ex-coal down -10.4% YoY
  • Intermodal units down -7.8% YoY
  • Total loads down -14.1% YoY

Shipping transport

Rail traffic turned negative and then progressively worse in pulses throughout 2015. While intermodal traffic quickly turned positive, domestic carloads, led by coal (for export) continued to deteriorate.  Rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff 4 weeks ago.  This has gone on long enough that I am simply scoring it a big negative.

After rising briskly last spring, both the BDI and Harpex recently declined again to new multi-year lows.  In the last few weeks, the BDI has rebounded enough for it to be scored a neutral.

Steel production

 

  • Up +0.4% w/w
  • Up +0.4% YoY

 

Until spring 2014, steel production had generally been in a decelerating uptrend.  It then gradually rolled over and got progressively worse in pulses through the end of 2015. In the last three months these became "less worse" and now positive. 

 
 

SUMMARY: 

 

Among long leading indicators, interest rates for corporate bonds, treasuries, the yield curve, real money supply, real estate loans, mortgage applications, and mortgage rates are positive.  At the same time, no interest rates have made new lows in at least a year, and mortgage rates have not made new lows for over 3 years, so while the "now-cast" is positive, this is a big negative in the longer term forecast.

 

The short leading indicators are mixed, but with marked improvement. The only significant negative remains the spread between corporates and treasuries, although it has improved significantly in the last several months.  But commodities across the board have improved enough to be scored as neutral, and stocks are now only slightly off their 6 month and all time highs, so are only a slight negative. The broad US$ is neutral, while against major currencies it is positive. Jobless claims remain positive. Oil and gas prices, and usage, remain very positive.

 

Among coincident indicators, rail transport, which had turned positive, had an absolutely awful week for the 5th week in a row.  Withholding taxes also turned negative again this week on a 20 day basis, although April is positive so far.  Bank rates and staffing also remain negative.  Shipping is mixed, with Harpex negative and the Baltic Index improved enough to be scored a neutral.  Steel is positive.

 

The big news over the last month has been the improvement to neutral or outright positive among a number of the long and short leading indicators (corporate yields, stock prices, commodities, the US$, new orders), while, with the exception of the improving Baltic Index, the negative pulse among several coincident indicators has markedly intensified (rail, tax withholding) and several others remain quite negative (Harpex, staffing).

 

While the industrial recession has deepened (see industrial production), the improvement in the long and short leading indicators argues that we are near the bottom, and a rebound should begin shortly.   The longer term issue remains that 2 of the long leading indicators, interest rates and corporate profits have failed to make new lows for a long enough time to be considered negatives, although interest rates are close enough to those lows to be positive for the shorter term "now-cast."

 

This coming week housing permits and starts will be vitally important to watch.  Will the improvement in mortgage applications finally show up in an increase in housing, perhaps the single most important long leading indicator of all?

 

Have a nice weekend!

 
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